RBI concerned about banks’ exposure to real estate, infrastructure

Mumbai: The Reserve Bank of India (RBI) is concerned about the extent of banks’ exposure to the real estate and infrastructure sectors, deputy governor R. Gandhi said on Wednesday. The real estate and housing sector accounts for 13-14% of banks’ exposure. When infrastructure in included, the exposure rises to 25% of total loans. “We are very much concerned about further exposure beyond these levels,” Gandhi said at a capital markets conference in Mumbai, adding that increasing exposure will not be prudent. Gandhi, however, clarified that there is no ceiling being placed on such loans and that such decisions must be taken at the level of the bank’s board. “It is not a ceiling. Banks cannot put all their eggs in one basket. They will have to definitely have a diversified portfolio. So when they have already reached 25%, naturally they will have hesitation in increasing it further,” Gandhi said responding to questions on the sidelines of the conference. The comments come at a time when there is increased focus on infrastructure projects and finance for them. Earlier this year, the central bank had eased norms for infrastructure lending by exempting long-term funds raised via infrastructure bonds from obligations such as priority sector lending and maintenance of statutory liquidity ratio (SLR). RBI had also allowed for flexible structuring of long-term project loans by allowing banks to commit to loans for up to 25 years while leaving open the option to refinance such loans every five years either through the bond markets or by selling the loans to other banks. The measures came after the failure of earlier efforts to encourage investments in infrastructure projects through bond markets. “On one hand, we have to take care of banking sector health, and, at the same time, we will have to support infrastructure. Natural growth will happen, but increasing the proportion beyond this may be a tall order,” Gandhi said, adding that bank finance will still be available for the infrastructure sector in line with the 15-20% growth in banking balance sheets that is typically seen each year. “Every year the balance sheet grows by 15-18%—to that extent there will be additional finance available. Whether that finance will be sufficient for the total demand, that we cannot say,” said Gandhi, adding that globally infrastructure is financed by institutions other than banks. However, attempts to develop the corporate bond markets in a way to support infrastructure financing needs have so far not been very successful, Gandhi said. Subba Rao Amarthaluru, chief financial officer at Ceat Ltd and RPG Group, said it is imprudent to put real estate and infrastructure into one basket as real estate has a greater element of risk due to the lack of transparency in operations. “Many sources including bond markets have dried up for infrastructure. If banks stay away from financing infrastructure companies, the nation will not be able to build infrastructure. Banks should make financing available even if infrastructure projects have 10% of risk element,” added Amarthaluru. A senior executive with a leading infrastructure firm said, “There are a series of initiatives to fund new projects, but no single programme to fund the existing projects. Companies have tapped market to address the debt woes, not to revive projects. RBI’s concern will put more pressure on infrastructure companies to source funds.” He requested anonymity citing the sensitivity of the matter. A real estate firm executive, who too requested anonymity, noted that such comments from senior central bank officials will have an adverse effect on the sector. “The regulator was visibly happy a few weeks ago about the prospects of real estate sector, and officials at the central bank went on the record about the same. I don’t know what has changed now,” said the executive. On 30 September, RBI governor Raghuram Rajan told reporters he is not overly concerned about the increase in real estate and housing loans.

Mumbai: The Reserve Bank of India (RBI) is concerned about the extent of banks’ exposure to the real estate and infrastructure sectors, deputy governor R. Gandhi said on Wednesday. The real estate and housing sector accounts for 13-14% of banks’ exposure. When infrastructure in included, the exposure rises to 25% of total loans.

“We are very much concerned about further exposure beyond these levels,” Gandhi said at a capital markets conference in Mumbai, adding that increasing exposure will not be prudent.

Gandhi, however, clarified that there is no ceiling being placed on such loans and that such decisions must be taken at the level of the bank’s board.

“It is not a ceiling. Banks cannot put all their eggs in one basket. They will have to definitely have a diversified portfolio. So when they have already reached 25%, naturally they will have hesitation in increasing it further,” Gandhi said responding to questions on the sidelines of the conference.

The comments come at a time when there is increased focus on infrastructure projects and finance for them. Earlier this year, the central bank had eased norms for infrastructure lending by exempting long-term funds raised via infrastructure bonds from obligations such as priority sector lending and maintenance of statutory liquidity ratio (SLR).

RBI had also allowed for flexible structuring of long-term project loans by allowing banks to commit to loans for up to 25 years while leaving open the option to refinance such loans every five years either through the bond markets or by selling the loans to other banks. The measures came after the failure of earlier efforts to encourage investments in infrastructure projects through bond markets.

“On one hand, we have to take care of banking sector health, and, at the same time, we will have to support infrastructure. Natural growth will happen, but increasing the proportion beyond this may be a tall order,” Gandhi said, adding that bank finance will still be available for the infrastructure sector in line with the 15-20% growth in banking balance sheets that is typically seen each year.

“Every year the balance sheet grows by 15-18%—to that extent there will be additional finance available. Whether that finance will be sufficient for the total demand, that we cannot say,” said Gandhi, adding that globally infrastructure is financed by institutions other than banks. However, attempts to develop the corporate bond markets in a way to support infrastructure financing needs have so far not been very successful, Gandhi said.

Subba Rao Amarthaluru, chief financial officer at Ceat Ltd and RPG Group, said it is imprudent to put real estate and infrastructure into one basket as real estate has a greater element of risk due to the lack of transparency in operations.

“Many sources including bond markets have dried up for infrastructure. If banks stay away from financing infrastructure companies, the nation will not be able to build infrastructure. Banks should make financing available even if infrastructure projects have 10% of risk element,” added Amarthaluru.

A senior executive with a leading infrastructure firm said, “There are a series of initiatives to fund new projects, but no single programme to fund the existing projects. Companies have tapped market to address the debt woes, not to revive projects. RBI’s concern will put more pressure on infrastructure companies to source funds.” He requested anonymity citing the sensitivity of the matter.

A real estate firm executive, who too requested anonymity, noted that such comments from senior central bank officials will have an adverse effect on the sector. “The regulator was visibly happy a few weeks ago about the prospects of real estate sector, and officials at the central bank went on the record about the same. I don’t know what has changed now,” said the executive.

On 30 September, RBI governor Raghuram Rajan told reporters he is not overly concerned about the increase in real estate and housing loans.

In an unprecedented order, the Bombay high court has ordered a Mumbai resident to shell out Rs 40 lakhs as legal costs while dismissing his application seeking to stop the allotment of a sprawling plot in Versova to a cooperative housing society and halt development by a city builder